Sufficient Statistics for Unobserved Heterogeneity in Structural Dynamic Logit Models

60 Pages Posted: 15 May 2018

See all articles by Victor Aguirregabiria

Victor Aguirregabiria

University of Toronto - Department of Economics

Jiaying Gu

University of Toronto

Yao Luo

University of Toronto - Department of Economics

Date Written: May 2018

Abstract

We study the identification and estimation of structural parameters in dynamic panel data logit models where decisions are forward-looking and the joint distribution of unobserved heterogeneity and observable state variables is nonparametric, i.e., fixed-effects model. We consider models with two endogenous state variables: the lagged decision variable, and the time duration in the last choice. This class of models includes as particular cases important economic applications such as models of market entry-exit, occupational choice, machine replacement, inventory and investment decisions, or dynamic demand of differentiated products. The identification of structural parameters requires a sufficient statistic that controls for unobserved heterogeneity not only in current utility but also in the continuation value of the forward-looking decision problem. We obtain the minimal sufficient statistic and prove identification of some structural parameters using a conditional likelihood approach. We apply this estimator to a machine replacement model.

Keywords: Panel data discrete choice models; Dynamic structural models; Fixed effects; Unobserved heterogeneity; Structural state dependence; Identification; Sufficient statistic.

JEL Classification: C23, C25, C41, C51, C61

Suggested Citation

Aguirregabiria, Victor and Gu, Jiaying and Luo, Yao, Sufficient Statistics for Unobserved Heterogeneity in Structural Dynamic Logit Models (May 2018). CEPR Discussion Paper No. DP12930, Available at SSRN: https://ssrn.com/abstract=3178101

Victor Aguirregabiria (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
4169784358 (Phone)

HOME PAGE: http://individual.utoronto.ca/vaguirre/

Jiaying Gu

University of Toronto

Yao Luo

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S3G7
Canada

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